Mid-September Was the Closest We’ve Come to a 2008-Style Crisis, and Most People Are Clueless

Mid-September Was the Closest We’ve Come to a 2008-Style Crisis, and Most People Are Clueless

One of the big stories in financial markets this year was the huge spike in interest rates on overnight repurchase agreements (repos). Very few people outside financial analysts and market watchers pay attention to repo markets or even know what they are, but these markets provide about $1 trillion in funding per day to financial institutions to keep them operating smoothly. The Bank for International Settlements (BIS), also known as the central bankers’ central bank, recently published an in-depth study of the repo market spike, and its conclusions are scary.

When repo market interest rates spiked in mid-September, the Federal Reserve immediately stepped in to provide liquidity to markets. Many people just took this for granted, assuming the Fed knew what it was doing. But the sheer size of the Fed’s intervention into the overnight repo markets was on a scale with the interventions it made in September 2008, when Wall Street was supposedly on the verge of complete collapse. That should have been the first clue that this wasn’t just a temporary glitch.

The next clue should have been the fact that the Fed remains involved in funding repo markets and providing liquidity, and shows no signs of exiting the market anytime soon. That essentially means that the market is broken, as it’s completely reliant on Federal Reserve funding. According to the BIS, the problems with the repo market include the fact that hedge funds rely on it heavily to leverage their financial positions. Many of them are incredibly highly leveraged in order to maximize their profits, so when overnight interest rates spike from 2% to 10%, those hedge funds are at severe risk of collapsing.

Many people remember Long-Term Capital Management (LTCM) and its near-collapse in 1998. LTCM failed in the aftermath of the Asian and Russian currency crises and had to be bailed out by the Federal Reserve. This time around, in mid-September, the Fed was potentially facing multiple LTCMs, with trillions of dollars worth of potential asset sales being triggered had these highly-leveraged hedge funds gone under.

It should be pretty clear that this wasn’t just an isolated occurrence, and this isn’t something that is going away anytime soon. Investors need to realize that the biggest threat to the economy isn’t the trade war, it’s internal market issues related to overleverage. The bottom could drop out of markets at any time, and investors who aren’t prepared for that could lose out in a major way.

Many investors have already moved to protect their assets by investing in gold, which maintains its value in the face of economic turmoil and financial crisis. They saw what gold did in 2008, as it rose while stock markets collapsed. And they know that when the next crisis occurs, they want to be invested in gold rather than stocks.

If you haven’t invested in gold already, what are you waiting for? Do you want to wait until your 401(k) loses 10%, 20%, or 30% of its value before you realize that you need to protect your retirement savings? Don’t let yourself be like the numerous people who didn’t adequately protect their assets in 2008 and saw their portfolios cut in half. Invest in gold today and know that your retirement investments will be safe and secure no matter what may happen next in financial markets.

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